93% Ethical, 93% Professional

I started this CFA thing in order to become a better private investor, and to open the doors to maybe one day becoming a professional investor too. So after signing up for the first CFA exam I was chomping at the bit to get my study guides and start learning things that would improve my trading.

However, Vol. I of the Level I study guides begins not with balance sheets, earnings projections, and discounted cash flows, but Ethics & Professional Standards.

For someone with strong quant leanings, this was – like – yawn… 🙄

Of course I understood the need for ethics and all that, but not being one who has problems with lying, cheating, and stealing, I found the prospects of studying pages & pages of good behaviour rules, shall we say, unmotivating. Preaching to the choir, if you will…

Here’s to lying, stealing, cheating, and drinking!
When I lie, I lie to save a friend…
When I cheat, I cheat death…
When I steal, I steal a maiden’s heart…
And when I drink, I drink with you my friend!

But on one level, just reading the various ethical case studies proved enjoyable because it provided glimpses into what the everyday “real world” experiences of being in the investing profession might be like. Insightful for a total outsider like me.

Now a lot of the material was somewhat common sense:

    • Don’t do things that could create – or appear to create – conflicts of interest.
    • Treat all clients equally & make their best interests your priority.
    • Don’t engage in behavior that causes the public to lose confidence in the integrity of capital markets.
    • No tipping off anyone when you’re privy to nonpublic material information (e.g. a coming change in an analyst recommendation).

And so on…

However there were many other sections that highlighted more subtle situations which, at first glance, could go one way or the other.

For example, what if you’re privy to inside information that could make a lot of money for your client? One of your prime directives is to act in his best interest & maximize his profits, right? On the other hand, there is that thing about preserving the integrity of the capital markets…

Poodle Study
Random Photo to Make You Go Awwww

After going a little over 100 pages into Volume I, you finish up ethics and come to a little practice test. There are only 27 questions covering this entire subject, but it provides at least some sort of barometer as to how well you know the material. Some of the questions even have a little graphic next to them that lets you know they came from previous CFA exams.

I got 25 of the 27 questions right, or about 93%. One of the misses was just careless – I read the question too fast (some of them are long). The other was a true miss…

The wonderful thing about these practice problems though is that in addition to giving you the correct answers, the CFA study guide also goes through each of the 4 possible answers to explicitly tell you why they do, or do not, make sense. Very helpful.

So after a short trip through the following section on Global Investment Performance Standards (much of which is optional) I’m finally breaking into my first taste of quantitative methods. 😛